Important to the variable loan
- Option for mortgage lending
Variable loans are particularly suitable for short-term mortgage lending.
- Take risk into account
The variable interest building loan is associated with a certain risk.
- Note interest rate
If interest rates on the interest rate market are low, borrowers benefit.
It is not always the credo of long-term fixed interest that is beneficial. Who needs a short-term real estate financing, can save significantly with a variable interest. However, the product is associated with a certain residual risk. Here you will find all the tips and information about the variable loan for mortgage lending.
How to find the right variable loan
A variable loan is based on an interest rate that is dependent on the money market rate of the European Central Bank. The variable loan is usually used for short-term mortgage or for interim financing for construction loans. A credit comparison helps to find the right financing option.
For mortgage lending, the variable loan is particularly suitable because even small interest discounts make themselves felt and borrowers have to pay significantly less interest on the loan amount.
When a variable loan comes into question
Those looking for a particularly flexible form of financing for their construction projects and wanting to save on lending rates are well served by a variable loan. However, borrowers need to be willing to take some risk because interest rates are not stable. Borrowers must also be able to settle the installments due when interest rates rise.
It is highly recommended that consumers have a basic understanding of the money market and its movements, as the interest rate is linked to the key interest rates of the European Central Bank. If, for example, you know in advance that the Euro Interbank Offered Rate is rising, you should not use variable interest rates.
To keep the risk low, the variable loan is particularly suitable for short-term financing.
Termination possibility without prepayment penalty
If you use a variable rate loan, you benefit from a special right of termination. By law you have the right to terminate the contract within a period of three months. There is no prepayment penalty, as the bank can not claim losses from a lost interest on the early repayment of the loan.
Advantages and risks
The interest rate of the variable interest is based on the Euro Interbank Offered Rate (Euribor), also called the base rate. This is the money market rate set by the European Central Bank. The height of the Euribor varies. Therefore, the interest rates on variable loans are adjusted to the European benchmark rate after three or six months.
Anyone who uses a variable rate loan should always keep an eye on the current interest rate. If you find that interest rates are rising as expected and over the long term, you have the option to terminate your loan agreement three months in advance.
The conclusion of a variable loan has several advantages:
- Cheaper interest rates
The loan will be cheaper if the European interest rate falls and thus also the lending rates.
- High flexibility
The loan can be terminated at any time with a notice period of three months.
- Elimination of prepayment penalty
If the loan is terminated, the banks do not charge prepayment penalties.
- Partial repayment or full repayment possible at any time
Variable loans can be redeemed in full or in part at any time.
- Conversion into fixed-rate loans
The switch to a fixed rate loan with rising interest rates is possible at any time. However, borrowers have to expect additional fees.
On the one hand, the variable loan offers many advantages. On the other hand, this particular loan carries some risks.
- rise in interest rates
If the Euribor rises, the borrower also has to pay higher interest rates. In the worst case, this interest may be higher than a fixed rate loan.
- Upper limit only possible with additional costs
The so-called interest cap is associated with additional costs that can make the loan significantly more expensive.
- High processing fees
Anyone who takes out a variable loan must expect much higher fees than a fixed-rate loan. Common fees are one percent. With a loan amount of 200,000 euros, that’s 2,000 euros.
- Additional costs if the credit rating is lower
If the credit rating falls during the variable loan, many banks reserve a credit premium, which can increase the cost of borrowing.
Switch to fixed rate loans
If you note that debit interest rates will increase significantly, you can convert your variable loan into a fixed rate loan. It is also possible that you select in advance a variable interest rate cap on the conclusion of the variable loan, from which your loan automatically converts into a fixed-rate loan. For this service, however, the bank usually requires between two and three percent of the loan amount.
In addition, the Bank may charge processing fees to convert a floating rate into a fixed rate. These are around two percent, but are spread over the entire term. So, if the fees are two percent of the loan, you’ll have to pay 0.2 percent a year for a 10-year term.
Renewed credit check on conversion
When converting to a fixed rate loan, the bank can re-examine your credit rating. If it has dropped, you will have to expect additional surcharges.
Variable loan vs. Fixed rate loans
The fundamental difference between a variable loan and a fixed rate loan lies in the constant level of interest. Thus, the monthly burden of a fixed-rate loan becomes more predictable. However, variable interest rates allow you to benefit from interest rebates on the Euribor. This option is not available for a fixed interest. Even if interest rates have fallen, you continue to pay the fixed interest rate.
Another important difference is the notice periods. While you can terminate the variable loan with a three-month notice, you must wait for the fixed-rate loan to reach the fixed interest rate.
Variable loan can be cheaper, but riskier
If it is foreseeable that the European interest rate will fall, a variable loan can be significantly cheaper than a fixed rate loan. Because the latter is always tied to the agreed at the beginning interest rate. However, variable interest rates risk raising the European interest rate again and thus significantly increasing the monthly installment burden due to the adjusted interest rates on loans.